Finances With Garth Turner

I've been meaning to do a posting about the Garth Turner event the other day, but haven't gotten around to it. While Garth is a good public speaker, I didn't really learn anything at the event that I didn't already know or believe. Yes, Garth believes real estate in Canada is in for a rocky ride, as do I. Yes, we are about to head into a period of asset deflation following by price inflation.

I've spent the last six months reading tons of books on investing and retirement, partially because I'm interesting in the subject, and partially because I've been a bit bored and felt like learning something new. I'd wager that I know more than the average person at this point about investment strategies and ways to build a nest egg.

But truthfully, even armed with all that knowledge I sometimes feel like we're in a world without any financial bullets. All the retirement calculations are based on returns of around 10%, often ignoring the affects of inflation. Investing in the stock market when it averaged 10% a year makes sense, but the return in the market for the last ten years has been effectively zero, and doesn't really show any signs of recovering. That means if you left your money in the markets over the last ten years, you'd have lost money due to the declining value of the dollar.

GICs are basically a waste of time and effort at the current interest rates. Unless you're willing to lock in for five years or more, chances are you're not even going to get a rate that matches the published inflation rates. Even if you do get a decent rate, GICs are taxed like interest, which means that are taxed at your marginal rate. For most people in a position to save money, that's at least 30%, more likely 43%. So that 4% GIC actually only nets you closer to 2% once you factor in the tax. And if your after tax net is less than the inflation rate (2.1%), you basically locked your money up for a period of time in order to lose money.

Garth's a big proponent of preferred shares. Preferred shares are issued by large companies and given more perks than typical common shares. When a company fails, preferred share holders are further ahead in line than common share holders. Also, if a company suspends dividends, a lot of preferred share holders will get catch up payments as soon as the company starts doing well again.

Some of the best preferred shares in Canada are issued by the banks. For example, Royal Bank recently issued a whack of preferred shares at around a 5.9% yield. Since preferred shares can be bought and sold like stocks, they are far more liquid than GICs. In addition, because the companies pay quarterly dividends, they are subject to the dividend tax rate which is generally smaller than the capital gains rate. So while there's the potential of the stock price to appreciate as well, preferred shares literally pay you to own them via company dividends. In Garth's words, take your money out of the bank and simply buy the bank instead (via preferred shares).

Garth said a lot more, but those were some of the highlights for me. My friend Duncan was at the event with me, so you can read his summary as well.